Can I Write Off My Car Payment for Tax Purposes?
Updated: Aug 13, 2020
The simple answer is yes. This article will breakdown who is eligible and under what circumstances one may receive a tax deduction for costs associated with operating a vehicle.
Are Car Payments Tax Deductible?
To claim a deductible on your tax return for vehicle operating costs, you must use your car for business, medical, or charitable purposes, and in some cases, relocating.
Under US tax law, taxpayers who own a business or are the sole proprietors can claim a deduction of car expenses on their tax return via a Schedule C. If the vehicle is utilized for both business-related and personal use, the respective expenses must be split accordingly. In this case, the deduction will only reflect the portion of business-related expenses.
Example: 6,000 Miles for Business + 4,000 Miles for Personal = 10,000 total miles
(6,000/10,000) * 100 = 60
Eligible to deduct up to 60% of the expense
There are two methods of calculating your tax deduction:
1. Actual Expense Method
Add up the following vehicle operating expenses for your business to calculate your deduction:
Monthly payments (leased or financed)
Tolls and parking fees
Maintenance and repairs
Car insurance and registration fees
2. Using the standard mileage rate found on IRS.gov
There may be additional requirements you must meet to use the standard mileage rate
Traveling to and from a home office may count towards your mileage deduction, but it is a good idea to double-check what counts as business use. Additionally, you should practice good recordkeeping of business use in a mileage log. Keeping an accurate record will ensure your deductions hold up if you are ever audited by the IRS. The IRS can audit you up to three years after you file your tax return, and will want to know:
The total mileage of your trip
The date of your trip
Where your trip took place and its purpose
Total annual business mileage
Total annual vehicle expenses (If you use the Actual Expenses method)
In the event you only have partial records, the IRS may approve your claim if you can provide sufficient evidence:
Your records are complete enough to establish a pattern of a week’s business driving
Receipts that corroborate an oral account of your business trips
NOTE: You may use a different form to claim your deduction if you’re a farmer (Schedule F), or an Armed Forces reservist, a qualified performing artist, or a fee-basis state or local government official (Form 2106).
Taxpayers are allowed to deduct out-of-pocket expenses when their vehicle has been used to provide services to a charitable organization. Examples of this may include traveling to volunteer for a hospital, school, or church. This deduction will be reflected on your Schedule A as part of your charitable donations. Alternatively, the IRS allows charities to reimburse volunteers up to the standard mileage rate of 14 cents per mile and will also be reflected on your Schedule A.
As an active duty member of the Armed Forces, you may be eligible to deduct your relocation expenses. If you travel by car, you can claim a tax deduction on your Form 3903 either by keeping track of your actual expenses or deduct up to the standard mileage rate.
Individuals who drive to obtain medical care for themselves or a dependent are eligible to claim a deduction of your actual expenses, or up to the standard mileage rate on a Schedule A as an itemized medical expense. The drive must be essential to the individual or a dependent.
Can you write off the purchase of a car?
As a small business owner or sole proprietor, you could be entitled to a tax deduction up to 100% of the purchase price of a vehicle. Currently, the two tax rules that allow one to write off the purchase of a vehicle are Section 179 Deduction or Bonus Depreciation. To qualify for either deduction, your vehicle must meet two requirements:
The vehicle begins operation within your business the same year it was purchased.
The vehicle must be utilized for business purposes more than 50% of the time.
Bonus Depreciation is a tax provision that currently can only be applied to vehicles placed in service between September 28, 2017, and December 31, 2022. The Bonus Depreciation provision allows the taxpayer to write off up to 100% of the purchase price on Form 4562, ONLY in the first year of the vehicle’s service within the business. Any vehicle that is “new-to-you” or leased, is eligible for this tax deduction, whether it was paid in cash or financed.
Section 179 Deduction offers small business owners or individuals who are self-employed the ability to claim a tax deduction on Form 4562 for the purchase of your new car. Your vehicle is eligible for this expense deduction if it is “new-to-you” or leased, and can be paid for in cash or financed. While Bonus Depreciation only applies in year one, Section 179 operates based on offering depreciation deductions over time. Vehicles can be deducted from your taxes over five years, as mandated by the modified accelerated cost recovery system (MACRS).
For the tax year 2020, Section 179 has a deduction limit of up to $1,040,000 on equipment purchases not exceeding 2.5 million. Generally, if the cap on equipment purchases is not met, Section 179 is taken first, followed by Bonus Depreciation -- unless the business has no taxable profit to report. There are two scenarios you may find yourself in:
If the taxpayer does NOT claim Bonus Depreciation, you may deduct up to the following amounts:
If the taxpayer DOES claim Bonus Depreciation, you are eligible to deduct the following amounts:
NOTE: If your vehicle weighs more than 6,000 pounds, you may be eligible for a larger tax deduction. See the section “How do cars and trucks differ in the amount you can write-off” for more information.
How do cars and trucks differ in the amount you can write-off?
There are two instances where vehicle, size, and weight may allow you to deduct more Section 179 in the first year:
An unloaded car with a gross vehicle weight rating (GVWR) exceeding 6,000 pounds, but less than 14,000 pounds can receive a Section 179 deduction up to $25,000 in the first year.
A loaded truck or van with a GVWR exceeding 6,000 pounds, but less than 14,000 pounds can receive a section 179 deduction up to $25,000 in the first year.
Your GVWR is located on your VIN label or can be searched for on the Internet.
Only your first year’s deductible expenses will be affected. The remaining MACRS depreciation period will resume in the second year:
The following are instances in which Section 179 does not apply, and you may be eligible to deduct expenses over $25,000 (full purchase price) up to the Section 179 maximum annual limit:
Your vehicle is designed to transport more than nine passengers behind the driver (shuttle van).
Your vehicle has an open cargo area spanning at least six feet long and not accessible from the passenger compartment (pick-up truck).
Your vehicle fully encloses the driver’s compartment and cannot hold passengers behind the driver’s seat (delivery van).
IMPORTANT: Before you file your tax return, it is recommended to consult a CPA or tax professional to ensure you’re receiving the best tax advice.
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